Managerial Extrapolation: Who and When?
54 Pages Posted: 26 Jul 2021 Last revised: 14 Jan 2022
Date Written: July 10, 2021
In this paper, we use managerial guidance data from I/B/E/S and an extensive list of controls to show a strong overextrapolation of earnings by firm managers. We find the degree of overextrapolation is driven by the persistence of the underlying earnings process as well as factors that can affect the representative heuristics, including salience, volatility, and local housing prices. Further, firms with a high expected earnings’ growth rate subsequently underperform their counterparts by 0.5% per month. By exploiting exogenous variations in firms’ profitability resulting from the Tax Cuts and Jobs Act of 2017, we provide clean evidence for managers’ overextrapolation of past earnings.
Keywords: Guidance, Extrapolation, Over-extrapolation, Earnings
JEL Classification: G12, E44, Q43
Suggested Citation: Suggested Citation